The term structure of banking crisis risk in the United States: A market data based compound option approach

Stefan Eichler, Alexander Karmann and Dominik Maltritz

Journal of Banking & Finance, 2011, vol. 35, issue 4, 876-885

Abstract: We use a compound option-based structural credit risk model to estimate banking crisis risk for the United States based on market data on bank stocks on a daily frequency. We contribute to the literature by providing separate information on short-term, long-term and total crisis risk instead of a single-maturity risk measure usually inferred by Merton-type models or barrier models. We estimate the model by applying the Duan (1994) maximum-likelihood approach. A strongly increasing total crisis risk estimated from early July 2007 onwards is driven mainly by short-term crisis risk. Banks that defaulted or were overtaken during the crisis have a considerably higher crisis risk (especially higher long-term risk) than banks that survived the crisis.

Keywords: Banking; crisis; Bank; default; Option; pricing; theory; Compound; option; Liability; structure (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:4:p:876-885

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